- The rise of Asia
The first, is the rise of Asia. It’s a point that’s been talked to death, but just about everyone I speak to, keeps mentioning this point.
Over the past 200 years, the balance of power has gradually shifted from Asia, to Europe and then the US. Over the next 50 years, that balance is going to shift back towards Asia.
The clear juggernaut in the room now is China. So in the coming years China will gradually rise to superpower status, and the world will need to learn to deal with China on China’s rules, and there will be more and more friction as that plays out. China views the existing global world order as one that was constructed by Western powers (to China’s exclusion), so they will gradually look to remold the global world order in their image. The BRI initiatives, a shift towards Yuan denominated trade, China wielding access to its 1.3 billion population as a negotiating tool, are all ways that it will achieve its gradual goal of returning China to the center of the world, much as it has been for much of human history.
But China has it’s own demographic and structural issues that lie ahead of it, and much of the low hanging fruit has already been plucked (eg. infrastructure building, manufacturing, credit growth etc). So China’s growth will inevitably slow in the coming years, if not because their base is now so large, so much of the future growth will gradually (hopefully) be picked up by SEA and India.
Indonesia and India combined have more than 2 billion people, many of whom are subsising on low wages. As this century drags on, and these people start hitting the middle class, it’s going to drive massive consumer demand, and radically restructure the balance of power as we know it.
Towards the middle of this century (2050~), Africa will gradually rise as the future engine of growth, simply due to demographics (massive untapped young population).
- The Fourth Industrial Revolution
The next one that I keep hearing about, is the power of technology. Most people I speak to think that we are living through a fourth industrial revolution (the first being steam automation, the second being mass production, and the third being IT).
But semantics aside, what is undeniable is that we are living through a period of great change brought about by information technology, and the pace of change is astounding. The steam industrial revolution took about 70 years to play out in its entirety, while the internet has only been around since the 1990s, and in a span of less than 30 years it has completely changed how we live.
Much of the revolution up till now has been driven by (1) increasing computing power, and (2) the internet facilitating the sharing of information. The second phase of the revolution, will lie in novel uses of computing power (machine learning and artificial intelligence) to solve old world problems.
And while the first phase of revolution was relatively kind to many old world industries (sectors like real estate, agriculture, commodities etc have been relatively spared for now), the second phase will impact just about every industry as we know it.
While the first phase was built around improving access to information (Uber, WeWork, Airbnb etc are ultimately platforms that leverage easy access of information), the next wave of opportunity will lie in deploying these newfound technologies to improving existing old world industries. So think of using machine learning to improve farming techniques, or organizing real estate more efficiently, or generating food tailored to each individual etc. It will force us to reexamine every single practice and process that we use today, and I believe that the pace of deployment, will astound us all.
To put things in perspective, back in the 1950s the average lifespan of a company in the S&P500 was about 70 years. These days, it is 15 years.
- Demographics (and Debt)
No matter how powerful the technological revolution is, it cannot make up for certain very powerful structural forces in play.
And these are (1) changing demographics, and (2) elevated debt levels.
Demographics, is the aging populations across most advanced economies, from Japan, to Europe, to Singapore, and even China. This is caused by a combination of lesser babies and increasing lifespans.
And this will put massive pressure on existing welfare systems, as each working adult will now need to support a larger number of retirees. This will eventually hit unsustainable levels (productivity growth cannot catch up), so the natural consequence here is (1) increasing retirement age, and (2) a relook of existing pension / support systems.
Debt, is where debt levels across most advanced economies are hitting elevated levels as a % of their GDP, at a time when interest rates are hitting negative levels.
At some point in the future, economic growth will gradually slow (as a result of demographic change – trade war is merely the catalyst for these underlying trends), so with elevated debt levels and interest rates close to zero, monetary policy will no longer be an effective tool to stimulate economic growth.
The next option will be through fiscal policy combined with monetisation of debt (basically huge government spending financed via money printing). This will increase money supply massively, effectively debase national currencies, and likely spark high inflation.
This will be the end of the long-term debt cycle that started since Nixon took the US off the Bretton Woods monetary system, and will spark a paradigm shift in global asset pricing.
Backdrop: Rising Inequality
It’s easy to look at all these factors in isolation and ignore the impact that they have on people’s lives. And the fact of the matter is that ever since the 2008 GFC, the money printing response from global central banks, while necessary, has inflated global asset prices.
It has created a situation where the rich who own many assets and have access to cheap credit to buy assets have seen a huge growth in their net worth, while the salaried working class who draw a salary have little to no increases in salary, while asset prices have inflated drastically.
This has contributed to elevated levels of income inequality on a historical basis. We’ve seen this many times throughout history. Just replace the rich business owners with “landowners” or the “bourgeoisie”, and the salary man with the “peasants” or “proletariat”, and you see that this cycle repeats itself throughout history.
Whenever income inequality in society hits a certain point, there are only 2 solutions. Either the ruling class comes together and enacts broad sweeping changes to combat inequality and create a system that benefits all members in society, or there is political revolution.
So while we’ve seen symptoms of the unrest in the form of Brexit, Trump, Hong Kong, Yellow Vests etc, none of the responses from the ruling class has done much to combat the underlying issue, which is inequality.
And until such time as the underlying issue has been resolved, we will continue to see rising discontent on a global level. In the years to come, I believe the level of discontent, and its manifestation in society, will surprise many of us in terms of how severe it will get.
How does this relate to investing?
The 3 key trends mentioned (1) Rise of Asia (2) Fourth Industrial Revolution and (3) Demographics (and Debt), have changed the world significantly. In this regard, we can see the manifestation of these changes in the immense growth of tech stocks, more and more Chinese companies listing on the NASDAQ and the rise of emerging markets such as Thailand, Indonesia and Vietnam.
At the same time, underscoring these big changes is the realization that past performance will not be a reliable indicator for future performance. There has been much talk about the bubble of index investing in the US markets, i.e., if you go into the S&P 500 today expecting 7% annual returns, you’ll be sorely disappointed. Whilst I still am a fan of index funds, I also agree that expectations have to be tempered with regards to returns, and that past performance should be not used as a definite predictor of future performance.
Technology has brought about unprecedented growth, but also the rapid destruction of sunset industries. More importantly, the pace of technological advance, such that this morning’s news is old news, will continue to ensure that there will no longer be guarantees in business. So while tech stocks have been on an absolute bull run in the past 10 years, the spectacular failures of recent big tech IPOs such as Uber and WeWork sends alarm bells ringing. The definition of insanity is to keep doing something and expect different results. If one cannot keep up with innovation, and bring real value to investors, each and every quarter, be prepared to be rendered obsolete.
Finally, it is quite heartening to note that while there is rising inequality, more opportunities are being made available to retail investors every day. This has been made possible by trend (2), insofar as technology has made investing more accessible than ever. For instance, platforms like EndowUs, and MoneyOwl bring access to big-boy funds, previously only accessible to institutional investors, and robo-advisors like StashAway make investing easy for beginners. Whether or not you think these platforms are worthwhile, the fact is that investing is more accessible than ever before, with increasingly low fees and low minimum sums. There is almost no excuse not to start investing nowadays, and I look forward to even better investment tools in the future.
In Part II of this article, I’ll talk more about the asset allocation strategy going forward.
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